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Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
Buildling in change: Project construction in asset-intensive industries
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Buildling in change: Project construction in asset-intensive industries

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Building in change: project construction in asset-intensive industries is an Economist Intelligence Unit report sponsored by Oracle. It delves into change management and collaboration in construction …

Building in change: project construction in asset-intensive industries is an Economist Intelligence Unit report sponsored by Oracle. It delves into change management and collaboration in construction projects. To develop this report, we conducted a survey of over 300 senior executives along with in-depth interviews with high-level practitioners and other experts. We would like to thank all interviewees for sharing their time and insight. The Economist Intelligence Unit carried out the analysis and wrote the report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. Sarah Fister Gale is the author of the report, and Brian Gardner is the editor.

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  • 1. Building in changeProject construction inasset-intensive industriesA report from the Economist Intelligence UnitSponsored by Oracle
  • 2. Building in change Project construction in asset-intensive industries Contents Preface 2 Executive summary 3 Introduction 5 Planning is not enough: change happens 7 Collaboration: extending the contractor relationship beyond handover 10 Building partnerships: an upfront process 13 Minimising the impact of change 15 Conclusion 17 Appendix: survey results 181 © Economist Intelligence Unit Limited 2012
  • 3. Building in change Project construction in asset-intensive industries Preface Building in change: project construction in asset-intensive industries is an Economist Intelligence Unit report sponsored by Oracle. It delves into change management and collaboration in construction projects. To develop this report, we conducted a survey of over 300 senior executives along with in-depth interviews with high-level practitioners and other experts. We would like to thank all interviewees for sharing their time and insight. The Economist Intelligence Unit carried out the analysis and wrote the report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. Sarah Fister Gale is the author of the report, and Brian Gardner is the editor. January 20122 © Economist Intelligence Unit Limited 2012
  • 4. Building in change Project construction in asset-intensive industries Executive summary A sset-intensive industries expend substantial resources on their capital projects, but predicting their long-term costs is often a fraught process. A principal reason for this is that construction is regularly beset by delays and cost overruns. As most projects must be commissioned and begin operating before they can provide any return on their investment, issues during construction present major risks for the owners of these assets. Unwanted project change is one of the most common reasons why construction schedules and prices are altered. The overwhelming majority of project owners in asset-intensive industries seek collaborative relationships with their contractors as a way to minimise the negative impacts of changes to construction projects. In addition, collaboration with contractors enables owners to better manage their risks and reduce the incidence of legal disputes. To explore change in construction projects, we conducted a survey of 304 senior executives worldwide in October 2011. The findings of the research, sponsored by Oracle, are as follows. l In the past, the owner/contractor relationship in asset-intensive industries was combative and litigious, but today owners view contractors as partners who can help them minimise the impact of change during project execution. Fully 91% of owners see their relationship with their contractors as “important” or “extremely important” to the process of managing change. l Owners who see contractors as partners after the project has moved into the operations phase are far more likely to view their contractors as essential to managing change. This is a departure from the traditional framework, in which the relationship concludes when construction is completed. Organisations which view the contractor relationship as “extremely important” during the operations About the survey respondents based in Western Europe, 29% in North America, 27% in the Asia-Pacific region and 15% in In October 2011 the Economist Intelligence Unit the rest of the world. Around four in ten respondents conducted a survey of 304 senior executives, drawn (41%) were C-level executives or above. More than two- in roughly equal measures from each of the following thirds (68%) of respondents came from organisations industries: oil and gas, utilities, infrastructure with more than US$500m in global annual revenue. (excluding utilities), chemicals, mining and metals. This paper is based on the results of the survey, and on This survey was global in scope, with 29% of the insights from the in-depth interviews.3 © Economist Intelligence Unit Limited 2012
  • 5. Building in change Project construction in asset-intensive industries phase are far more likely to say it is an “extremely important” aspect of change management – 91% compared with the 50% of respondents who did not rate the importance of the relationship as highly in the operations phase. l Penalties are not the most effective line of defence against unplanned negative changes. While owners will hold contractors accountable if they fail to meet agreed targets, they recognise that a collaborative, open relationship helps them more accurately to predict costs (67%), avoid contract disputes (65%) and deal with change in a proactive way (57%). l Project owners must establish explicit contract expectations, vet contractors and define roles clearly if they are to benefit from these collaborative relationships. Through these steps and participation in up-front team-building exercises owners are more likely to resolve issues faster, avoid disputes, and reduce the impact of change to their projects. l Unplanned change during major construction projects is seen as inevitable, but owners often lack adequate skills to manage its impact. Barely half 51% of respondents rated themselves as effective at delivering their projects to scope, budget and schedule when confronted with change. Only 43% rated as effective at anticipating potential change. Over one-half of respondents (52%) rank themselves as average or below at managing change. These findings indicate significant room for improvement.4 © Economist Intelligence Unit Limited 2012
  • 6. Building in change Project construction in asset-intensive industries Introduction O wners of construction projects in asset-intensive industries may know what they want to accomplish, but they lack precise means of predicting how much time or money it will take to achieve their goals. “The risks associated with projects that span many years are vast and unpredictable,” states Dick Wynberg, the head of Shell Project Academy, which specialises in project management for Shell International, the global oil and gas giant based in The Hague, Netherlands.“Twenty-five years, An inability to predict and manage change can result in substantial cost and schedule overruns. Moreago most projects than one-third of the executives surveyed for this report say they miss their budget (39%) and schedulewere managed (34%) targets on major projects at least one-quarter of the time; and more than 60% of respondentsin an adversarial blame unexpected change for at least one-half of all project overruns. While they frequently acknowledgeenvironment.” that some change is inevitable on large-scale projects, they admit that they could vastly improve how theyStephen Schmitt, vice deal with these changes.president of engineering In the past, the struggle to effectively manage unplanned change was intensified by hostile and oftenand operations support forAmerican Water. litigious relationships between project owners and their contractors. Lump-sum contracts (based on fixed price bids) that laid all the risk on contractors, combined with a lack of transparency and trust, made it far more difficult to minimise repercussions of change. When change did occur, the focus on finger-pointing rather than problem-solving often resulted in massive schedule and budget overruns, as well as contract disputes that led to costly litigation. In your estimation, what percentage of your organisation’s construction projects… …come in on schedule? (% respondents) …come in on budget? 90-100% 23 19 75-89% 43 42 50-74% 23 24 25-49% 8 11 Less than 25% 3 4 Source: Economist Intelligence Unit survey, October 2011.5 © Economist Intelligence Unit Limited 2012
  • 7. Building in change Project construction in asset-intensive industries Of those projects that were not delivered on budget, what percentage of the overrun do you attribute to unexpected change? (% respondents) 90-100% 19 75-89% 23 50-74% 22 25-49% 15 Less than 25% 21 Source: Economist Intelligence Unit survey, October 2011. “Twenty-five years ago, most projects were managed in an adversarial environment,” says Stephen Schmitt, vice president of engineering and operations service for American Water, a publicly traded US water and utility company based in New Jersey. But owners in these industries have come to recognise the value of long-term collaborative relationships with their contractors that continue into the operational phase. These partnerships, coupled with better planning and contract documents that encourage project teams to seek proactive solutions, have enabled many organisations to achieve better project results. By working together as a team and clearly defining goals and strategies for project delivery from the outset, they are able to spot unexpected issues sooner, handle problems and devise more creative solutions that keep projects on track.6 © Economist Intelligence Unit Limited 2012
  • 8. Building in change Project construction in asset-intensive industries Planning is not enough: change happens“It’s hard to predictwhat the global B uilding an oil refinery, a rail line or a chemical production facility requires massive resources and takes years to accomplish. During that time volatility in material costs, labour shortages,economy is going unanticipated site conditions, extreme weather and changes in regulatory requirements are just a few ofto look like three the many risks that can be nearly impossible to predict, but that make unscripted change inevitable evenor four years in in the best-laid project plans.advance, and that Inevitably, the bigger the project, the more complicated it becomes to predict and manage thatintroduces a lot of change. Joseph Brewer, project director for Dow Chemical, is leading the Sadara Project, a US$20bn jointchallenges.” venture in Saudi Arabia between Dow and the energy and petrochemicals giant Saudi Aramco to buildJoseph Brewer, Dow a chemical production facility with 3m metric tonnes of capacity. The project will span eight years fromChemical project director,leading a US$20bn joint planning to start-up, and Brewer admits there are many unknowns with such a long-range project. “It’sventure between Dow and hard to predict what the global economy is going to look like three or four years in advance, and thatSaudi Aramco. introduces a lot of challenges,” Mr Brewer says. When planning for Sadara began in 2007, for example, the construction industry in Saudi Arabia was booming, material prices were high, and access to labour was tight. Four years later construction is kicking off under completely different economic conditions. Dow tries to manage these unknowns by building flexibility into its contracting strategy, securing volume price deals ahead of schedule to reduce price volatility and working collaboratively with its contractors to deal with hitches before they get out of hand. Even with diligent efforts, unplanned change cannot be completely eliminated, and project owners regularly have to adapt their plans to deliver the project to specifications, which is their first priority. It is not enough for projects to come in on time or on budget; they must deliver to performance expectations. In your estimation, what percentage of your organisation’s construction projects come in to specifications? (% respondents) 90-100% 46 75-89% 34 50-74% 13 25-49% 4 Less than 25% 2 Source: Economist Intelligence Unit survey, October 2011.7 © Economist Intelligence Unit Limited 2012
  • 9. Building in change Project construction in asset-intensive industries This is why meeting the defined specifications of these projects is crucial, says Mr Schmitt. “The success of our capital projects is ultimately measured by whether our assets meet our customer and utility service needs.” Our survey shows that they do so: fully 80% of respondents overall meet project specifications at least three-quarters of the time on their projects. However, an inability accurately to predict and manage the impact of unplanned changes makes it difficult for many organisations to deliver the project within the confines of the original budget and schedule. Unexpected changes force project owners to rework plans and costs, and create opportunities for dispute with contractors if the solutions are not equitable for everyone involved. This can frustrate all parties. Delivering the project to scope, budget and schedule is the number one challenge in dealing with change. Yet survey results show that project owners lack confidence in their ability to handle almost all aspects of change. Roughly one-half of respondents rank their organisations as average or below- average at anticipating change (55%), measuring the impact of change after it is implemented (55%), making contingency plans to accommodate potential change (51%) and conducting a risk analysis of the change (48%). CASE STUDY 1: Texas Health Resources sees would be able to match patients more quickly with the change as an opportunity most appropriate staff. The change directly aligned with the broader business goals of the project: to enhance the patient and caregiver experience. However, to accommodate the change the team had Not every change to a project is driven by unplanned to add sensors, software applications, hardware, events. On complex high-tech projects, plans are additional network lines and other infrastructure to the often altered mid-stream because a better class of project scope. technology or solution becomes available. Joe Johnson, the manager of Texas Health’s project Such was the case for Texas Health Resources, a US management office (PMO) helped develop a business healthcare organisation. In 2009 Texas Health began case with both the justification for the change as design of a state-of-the-art hospital in Fort Worth. well as the costs. These included purchasing the RTLS After the IT budget for the facility was set and technology and sensors for tracking people, along construction of the infrastructure began, the IT with a suite of standard applications the team felt was project team determined that improved technologies needed to achieve the desired hospital experience. The could deliver more cutting-edge functionality at the final additional cost stemming from the change was hospital, albeit at a significant additional cost. The worth millions. change included adding Real Time Locator System “The executives were not excited that we brought (RTLS) technology to track patients and providers in such a big cost to them,” Mr Johnson says. “But from a the building. business standpoint they understood the benefit that The original project plan included the use of RTLS the changes and the standardised applications would to tag physical assets, so the staff could more rapidly bring to the patient and caregiver experience, so they track medical equipment in the facility. But project were supportive.” Key here was quantifying the added leaders realised that by using an upgraded version of value the change would provide over the project’s the technology to track people, Texas Health Resources lifecycle.8 © Economist Intelligence Unit Limited 2012
  • 10. Building in change Project construction in asset-intensive industries How effective is your organisation at these aspects of managing change on construction projects? Rate on a scale of 1 to 5, where 1=Extremely effective; 3=Neutral; 5=Not at all effective. (% respondents) 1 Extremely 2 3 Neutral 4 5 Not at all Don’t know effective effective Anticipating potential changes 8 35 41 11 3 3 Making contingency plans to accommodate potential changes 7 39 36 12 3 2 Assessing the feasibility and cost of changes 15 45 29 7 2 3 Defining the ROI of the change to the project and making the business case for change to stakeholders 11 31 35 14 5 4 Delivering the project to scope, budget and schedule despite the change 11 40 26 17 4 2 Communicating the lifecycle impact of change to everyone involved with the project 10 28 30 18 10 3 Conducting risk analysis of the change 11 38 30 14 4 3 Measuring the impact of the change after it has been implemented 9 31 32 17 6 5 Source: Economist Intelligence Unit survey, October 2011. These results are hardly surprising since unexpected change is by definition a difficult risk to assess, and many companies thus struggle to implement strategies to anticipate it. The only areas where they show some confidence is in assessing the feasibility of implementing a change and its likely cost, which 60% say they do effectively. This suggests that while companies cannot predict change, once it is required, they know how to factor it into the budget and project plan. These data underscore two crucial issues: project owners are willing to spend extra time and money to get a project done right, but predicting how much time or money it will take to achieve their goals is an uncertain process. Until they improve their tracking and change-management processes, they are likely to continue to incur added cost and time when changes occur.9 © Economist Intelligence Unit Limited 2012
  • 11. Building in change Project construction in asset-intensive industries Collaboration: extending the contractor relationship beyond handover“The greatestopportunity to O wners in asset-intensive industries overwhelmingly believe that building collaborative relationships with contractors will help them improve project outcomes and minimise the impact of change. Fullyinfluence the 85% and 90% of respondents, respectively, say that collaborative relationships with contractors areoutcome of a “important” in the planning and execution phases, and 91% say they are important to managing changeproject is during on projects. According to more than 60% of respondents, these relationships are “extremely important”the concept and in these project phases. Such high numbers underscore the critical role played by collaboration betweendesign phase.” owners and contractors from the earliest stages if change is to be managed effectively.Ernie Wright, managing Three out of four smaller firms (defined as those with US$500m or less in annual revenue) say thedirector for the Americas atBlack & Veatch. contractor relationship is “extremely important” during planning, compared with roughly 60% across the entire sample. This suggests that smaller companies rely more heavily on contractor expertise to guide the planning process. This does not surprise Ernie Wright, managing director for the Americas at Black & Veatch, a global engineering, consulting and construction company. “The greatest opportunity to influence the outcome of a project is during the concept and design phase,” he says. Choosing contractors early and involving them in planning and design helps align owners and contractors around project goals, and enables stakeholders to identify potential problems when they are easier to fix, says Art Misiaszek, senior programme director for Amtrak, the US government-owned passenger rail service. “A good working relationship with contractors improves the schedule, resolves In your opinion, how important is the contractor/owner relationship during each phase of a construction project? How important is the relationship when managing change throughout the project? Rate on a scale of 1 to 5, where 1 = Extremely important and 5 = Not at all important. (% respondents) 1 Extremely 2 3 4 5 Not at all Don’t know important important Planning 61 24 9 5 11 Execution 65 25 6 21 Commissioning 47 32 16 4 11 Operations 31 33 23 9 31 Managing change 63 28 5 2 1 Source: Economist Intelligence Unit survey, October 2011.10 © Economist Intelligence Unit Limited 2012
  • 12. Building in change Project construction in asset-intensive industries“A good working issues, saves us cost and prevents claims that can What are the most important consequences of having an open and collaborative relationship withrelationship lead to litigation.” contractors on construction projects?with contractors The owners who value collaborative Select the top three. (% respondents)improves the relationships see contractors as an extension ofschedule, resolves their team, and believe they foster a workplace More accurately predicted costs 67issues, saves us environment that focuses on problem solving. Reduced need for contingency planning 26cost and prevents Survey respondents say these collaborations help Fewer contract disputesclaims that can them better predict costs (67%), avoid contract Fewer change requests 65lead to litigation.” disputes (65%) and respond more proactively to 26 Facilitates responding to problems proactivelyArt Misiaszek, senior potential problems when they inevitably arise 57programme director for Reduces scope creepAmtrak. (57%). 23 One-third of respondents also consider Source: Economist Intelligence Unit survey, October 2011. these relationships extremely important in the operations phase. “Despite best efforts you always find issues that need to be addressed during operations,” says Mr Schmitt. Whether it is a leaking roof or a latent defect in a piece of equipment, problems relating to the project can still arise even months after a facility is operational. “Being able to reach back out to our contractor in the same collaborative fashion during this phase makes it much easier to resolve these issues.” The more traditional view, held by one-third of survey respondents, is that contractor collaboration is not important after a project has been handed over to the owner/operator. But those that do value CASE STUDY 2: American Water contractor digs up a president of engineering and operations service for American Water. solution The contractor agreed to cover the substantial upfront mobilisation cost for the trenchers, and in exchange American Water promised to expedite easements and local improvements so they could work continuously, rather than hop-scotching from site to site, which In one recent project American Water faced considerable push-back would have been prohibitively expensive. The contractor was able to from a Kentucky community over traffic disruption caused by the make up the upfront cost by reusing the limestone as backfill for the installation of a 30-mile underground water transmission line. The roads rather than trucking in new material. utility company’s contractor ultimately found a solution that saved American Water invested additional man-hours and resources to everyone time and money. secure the easements and thanks to this approach, the final project When construction began, project teams found a heavy layer came in on time and on budget, with 100% acceptance from the of limestone in the ground that would have slowed the excavation utility commission, Mr Schmitt says. “The up-front cost was more, but process substantially, causing locals to complain about a long-term the ultimate cost of the project and the impact to the community were disruption. The utility brought the contractor to local meetings, less.” involved it in brainstorming solutions and ultimately supported He argues that the only way to achieve such equitable, cost- its idea to bring in massive trenching equipment, which could cut effective solutions is by treating contractors as partners and involving through the limestone much faster than backhoes. them in these decision-making processes. “If you come up with “It’s so much easier to identify the best alternatives when the solutions without getting the contractor’s input, you often can contractor is part of the discussions,” says Stephen Schmitt, vice unknowingly introduce means for dispute.”11 © Economist Intelligence Unit Limited 2012
  • 13. Building in change Project construction in asset-intensive industries In your opinion, how important is the contractor/owner relationship during the operations phase of a construction project? How important is the relationship when managing change throughout the project? (% of respondents) Extremely important during operations Not extremely important during operations Extremely important to managing change 91 50 Not extremely important to managing change 9 50 (Number of respondents) Extremely important Not extremely important Total during operations during operations Extremely important to managing change 85 102 187 Not extremely important to managing change 8 103 112 Source: Economist Intelligence Unit survey, October 2011. collaborative relationships recognise the inevitability of change once a facility is up and running. Partnerships enable them to rely on their contractors to help them tweak their systems even during operations. These owners see that this enables them to maximise the return on their investment. Respondents are much less likely to say such relationships reduce the number of changes (26%), the need for contingency planning (26%) or scope creep (23%). Most respondents accept that change can’t be eliminated; the critical concern is managing it effectively.12 © Economist Intelligence Unit Limited 2012
  • 14. Building in change Project construction in asset-intensive industries Building partnerships: an upfront process T he benefits of collaborative relationships are well understood, but they can only be achieved if collaboration is a goal from the outset and owners vet potential contractors carefully, considering expertise, experience, longevity and history of contract disputes. “One thing we’ve learned is that you don’t choose a contractor by the brand, you choose it by the people,” says Shell’s Mr Wynberg. “They are the ones who will deliver your project, and they are the ones you have to build a relationship with.” And while cost is always a factor, the lowest bidder may not always be the best choice – especially if they underbid themselves, says Dow’s Mr Brewer. “In this market, an over-eager bidder might offer an attractive price, but when it comes time to deliver they choke,” he says. That leads to conflict as contractors attempt to mitigate their own risks instead of meeting the needs of the project. Low-price bidders may also lack experience, which increases the risk of change as well safety issues, says Mr Misiaszek. This is why Amtrak employs a “best value” procurement process for complex projects rather than simplified bidding. This allows the company to focus its consideration on those bidders who have proven experience in the rail industry. Selecting contractors with extensive expertise specific to Amtrak’s industry reduces risks and increases the chance that the contractor will be able to deal with changes more effectively because it has confronted them before. This seems self-evident, but the reality is that it can also drive up costs and prevent some market entrants. However, it is one means of mitigating the potentially high costs of mismanaged change during initial project planning. Once a contractor is chosen, effective collaboration is best achieved when the contract documents are precise, defining roles and responsibilities for all parties, payment expectations and escalation steps when problems do occur. Every organisation has a different opinion on which contract style works best, but all agree that the more specific the documents are, the greater the likelihood that changes will be dealt with early and with the least impact on the project. American Water achieves this clarity by using contracts defined by the Engineers Joint Contract Documents Committee (EJCDC), which are comprehensive, legally sound and balanced. The documents include requirements for change submittals and reviews and clearly define the consequences to all parties for missing deadlines or changing project specifications. Mr Schmitt says the implementation of these contracts, coupled with efforts to improve the organisation’s working relationship with contractors, has had a dramatic impact on the project delivery environment at American Water. “Today, everything is laid out in contract agreements, and the firms we work with realise that a more collaborative approach ensures mutual success.”13 © Economist Intelligence Unit Limited 2012
  • 15. Building in change Project construction in asset-intensive industriesAlignment The team building that is vital to a collaborative relationship is best achieved early on throughprocesses: networking and goal-setting exercises. This is true for both sides. Black & Veatch encourages its clients“It doesn’t change to participate in an alignment process in which they jointly define project goals, how they will deal withthe obligations day-to-day issues, escalation steps and formal processes for decision-making. “It doesn’t change theof the contract, obligations of the contract, rather it sets the stage for better communication and problem solving,” Mrrather it sets the Wright says.stage for better Once a project kicks off, Black & Veatch reinforces this alignment through daily stand-up meetings tocommunication identify near-term concerns and assign people to deal with them. This helps to get issues resolved beforeand problem they result in change requests, he says. “When you do the alignment process right, the people who aresolving.” closest to the problem can solve it with the least amount of escalation.”Ernie Wright, managing Dow takes a similar approach, inviting contractors and stakeholders to participate in team-buildingdirector for the Americas atBlack & Veatch. sessions facilitated by third-party consultants during project planning. In these meetings they discuss project objectives, set goals and define responsibilities, ensuring everyone is clear about what they are responsible for and what to do when problems arise. On long-term projects, they host additional team- building sessions throughout the project life cycle. “It’s a way to eliminate ambiguity, and it is a key component to integrating the team,” Mr Brewer says. CASE STUDY 3: Reimbursable contracts keep construction that the building site was unstable owing to porous clay Shell on track and out of court in the soil, causing the project to be immediately shut down while they searched for a solution. Shell took responsibility for the delay as it had missed the problem in the soil survey. Even so, says Mr Wynberg, if the contractor had Reimbursable contracts (which cover contractor costs and then been working on a lump-sum basis, the situation would easily have provide an agreed profit margin) frequently make more sense than gotten contentious while the added costs and delays were sorted fixed-price agreements because they cost the owner less and create out. This is particularly the case when the owner shares part of the a more open, communication-rich relationship with contractors. This responsibility, but even in less ambiguous circumstances fixed-price is why Dick Wynberg, head of Shell Project Academy, prefers them for contracts are more likely to lead to litigation as each party focuses on the most complex project investments. minimising its downside risk. “With a fixed-price project, the risk lies entirely with the Instead, the contractor and the owner’s project stakeholders contractor, which means they have to factor the cost of every risk focused immediately on solving the problem and looking for ways to into their bid price, even if they never occur,” he says. Reimbursable reprioritise activities that would make up for schedule delays. This contracts eliminate this need, and create a foundation for a more included preloading soil to squeeze the water out of the clay, and collaborative relationship. “Everything is an open book, and the redesigning the foundation to use preassembled pieces built off-site. relationship can really blossom.” As a result of effective collaboration, the four-year project was Mr Wynberg points to Shell’s Eastern Petrochemicals Project to completed on time in early 2010. “It was nice to go right into solution build an integrated refinery and petrochemicals hub for new and mode, instead of claims mode,” Mr Wynberg says. “It meant we could existing assets in Singapore. The contractor discovered early in come to a practical solution quicker with no litigation.”14 © Economist Intelligence Unit Limited 2012
  • 16. Building in change Project construction in asset-intensive industries Minimising the impact of change D espite wide-ranging efforts, change requests still occur. When they do, owners are most concerned with how changes will affect the schedule (52%), their associated risks (45%) and their impact on cash flow (42%). Owners are less worried about whether they can make up the difference (23%), who will pay for what (21%) or whether sponsors want the change (12%), indicating they see change is inevitable and they focus on how to address it. Interestingly, the top strategies cited to minimise the negative impact of change are all linked to planning, communication and collaborative relationships. These include clearly defining goals during planning (59%), regular communication between owners and contractors (54%) and conducting frequent progress reviews with the contractor (41%). Strategies that focus on incentivising or punishing contractors, including tying fees to project goals and defining legal escalation steps for dispute When you address change requests on a construction In your opinion, what are the best strategies for project, what are the most important factors to minimising the impact of change requests on a consider? construction project? Select the top three. Select the top three. (% respondents) (% respondents) How the change will affect the schedule Clearly define project goals and objectives during the planning stage 52 59 The risks associated with the change Maintain regular communication between owners and contractors 45 54 The long-term cash flow implications of the change Conduct frequent progress reviews with the contractor over the lifecycle of the project 41 42 Formalise clear processes for assessing and managing change requests The direct price of the change 31 35 Reward contractors for identifying problems before they affect the project The feasibility of the change 28 34 Tie contractor fees to delivery of critical project goals The opportunity costs associated with the change 26 23 Involve business leaders from across the organisation in project planning Whether you can make up the time/cost in other areas of the project 24 23 Prepare contingency plans for all major tasks How costs will be shared between contractor and owner 13 21 Define legal escalation steps for dispute resolution Whether the project sponsors want the change 5 12 Pad the project’s schedule and budget Source: Economist Intelligence Unit survey, October 2011. 4 Require arbitration in cases of unresolved conflict 2 Source: Economist Intelligence Unit survey, October 2011.15 © Economist Intelligence Unit Limited 2012
  • 17. Building in change Project construction in asset-intensive industries“Good resolution, were cited much less often, indicating that most organisations believe communication is acommunication better strategy than fear of penalty for meeting project goals.between “Good communication between contractors and owners is the biggest factor for project success,”contractors and says Joe Johnson, PMO manager for construction projects at Texas Health Resources. “If you’re notowners is the communicating about change, risk and your vision for the project, you’ll run into problems down thebiggest factor for line.” When project owners work collaboratively with their contractors, they focus more rapidly onproject success. identifying solutions when problems arise. This helps them resolve issues faster, with less impact andIf you’re not fewer disputes.communicating Amtrak, for example, relied on its contractor relationship to mitigate the impact of a labour strike inabout change, risk the Chicago rail yards that shut down a US$100m renovation project in June 2010. Rather than abandonand your vision for the project during the month-long shut-down, Amtrak’s contractor worked with the organisation tothe project, you’ll address elements of the project that could be dealt with offsite, including developing a plan to deal withrun into problems contaminated groundwater and material issues that would have affected project progress later on.down the line.” Once the strike was over, owner and contractor collaborated to identify ways to accelerate the work,Joe Johnson, PMO manager through double shifts and overtime, to get the project back on track. Even though Amtrak had extendedfor construction projects atTexas Health Resources. the contractor’s deadline, the company delivered the project early. “It was never a contentious issue,” Mr Misiaszek says of the impact the strike had on the project. “They knew they would be compensated fairly, and that it was in everyone’s best interest to work as a team.” A clearly defined contract and an open, non-combative relationship make it easier to achieve accountability and the best possible solution, according to Mr Brewer. When a contractor comes to him with a problem, such as not being able to fulfil a piece of the contract as specified, he will work with that partner to find an equitable solution, and will even consider qualifying new vendors to help meet the project goals. And while incentives and damages are not a first line of defence against project change, many owners minimise the frequency and impact of change by providing incentives for contractors to identify problems early and/or assessing damages for delaying a response. “This strategy focuses everyone on resolving issues quickly, so we don’t end up with schedule delays,” Mr Misiaszek says. Once resolutions are achieved, the most effective organisations review the change, from cause to resolution. They capture these lessons learned in shared databases, so future teams can avoid or at least minimise similar risks on future projects. At Texas Health Resources, for example, recent hospital construction projects have faced budget overruns with regard to IT, as the organisation struggled to specify equipment, technology and infrastructure in project plans that would not be installed for several years. To minimise these unknowns, the IT team has proposed using historical project data to predict a budget based on a percentage of the total of the project rather than specific technology. “That way, we may not know exactly what equipment we’ll use, but we can come up with a baseline for what it should cost,” Mr Johnson says.16 © Economist Intelligence Unit Limited 2012
  • 18. Building in change Project construction in asset-intensive industries Conclusion O wners and contractors in asset-intensive industries know that predicting the budget and schedule for a project that spans many years is an imprecise science, and that the risk of change cannot be completely avoided. As a result, their goal is to minimise the impact of these changes by being proactive and transparent. Thorough project planning and collaborative contractor relationships enable owners and contractors to carry out mutually beneficial construction projects, despite the significant challenges of managing change. Executives interviewed for this research offer the following advice on how to build successful collaborative contractor relationships and create a project culture where problems are identified and addressed before they lead to major delays l Acknowledge that change is an inevitable aspect of asset-intensive projects and that it adds risk to the outcome. “If you talk openly about how you will manage that risk and who will be responsible for what, it goes a long way toward relieving uncertainty with contractors,” says Joseph Brewer, project director for Dow Chemical. l Don’t cut planning time to hurry construction along. “The added time spent clearly defining goals up front can help you avoid problems later on,” affirms Dick Wynberg, head of Shell Project Academy. l Consider previous contract disputes as part of the vetting process. “A contractor with a history of litigation is more likely to be aggressive rather than collaborative, and will look for contract errors that they can exploit,” according to Stephen Schmitt, vice president of engineering and operations service for American Water. l Take the time to develop your contractor relationship through team-building sessions. “You can’t be successful without a well-integrated team,” states Mr Brewer. l Create a central database of lessons learned so everyone is aware of process improvements, and consider interviewing project teams to create videos of lessons learned, Mr Wynberg suggests. “It’s an excellent way to capture critical knowledge and make it part of your project training process.” l It is better to look for amicable solutions than to fight over who is to blame. “Our experience shows that litigation over contract disputes that could have been properly managed earlier and in a proactive way, is a very unproductive use of time and resources,” says Mr Schmitt.17 © Economist Intelligence Unit Limited 2012
  • 19. Appendix Building in changeSurvey results Project construction in asset-intensive industries Appendix: survey results Percentages may not add to 100% owing to rounding or the ability of respondents to choose multiple responses. What is your primary industry? (% respondents) Chemicals 21 Infrastructure (excluding utilities) 21 Oil and gas 20 Utilities 19 Mining and metals 19 In your opinion, how important is the contractor/owner relationship during each phase of a construction project? How important is the relationship when managing change throughout the project? Rate on a scale of 1 to 5, where 1 = Extremely important and 5 = Not at all important. (% respondents) 1 Extremely 2 3 4 5 Not at all Don’t know important important Planning 61 24 9 5 11 Execution 65 25 6 21 Commissioning 47 32 16 4 11 Operations 31 33 23 9 31 Managing change 63 28 5 2 118 © Economist Intelligence Unit Limited 2012
  • 20. Appendix Building in changeSurvey results Project construction in asset-intensive industries What are the most important consequences of having an Compared to your competitors, how effective is your open and collaborative relationship with contractors on organisation at managing change on major construction construction projects? projects? Select the top three. Rate on a scale of 1 to 5, where 1 = Significantly better and (% respondents) 5 = Significantly worse. (% respondents) More accurately predicted costs 67 1 = Significantly better Less accurately predicted costs 9 5 2 Reduced need for contingency planning 41 26 3 Increased need for contingency planning 43 5 4 Fewer contract disputes 8 65 5 = Significantly worse More contract disputes 1 2 Fewer change requests 26 More frequent change requests In your estimation, what percentage of your organisation’s 5 construction projects come in on schedule? Facilitates responding to problems proactively (% respondents) 57 It becomes more difficult to respond to problems proactively 90-100% 1 23 Reduces scope creep 75-89% 23 43 Increases scope creep 50-74% 1 23 Other 25-49% 2 8 Less than 25% 3 In your opinion, what are the best strategies for minimising the impact of change requests on a construction project? Select the top three. In your estimation, what percentage of your organisation’s (% respondents) construction projects come in on budget? (% respondents) Clearly define project goals and objectives during the planning stage 59 90-100% Maintain regular communication between owners and contractors 19 54 75-89% Conduct frequent progress reviews with the contractor 42 41 50-74% Formalise clear processes for assessing and managing change requests 24 31 25-49% Reward contractors for identifying problems before they affect the project 11 28 Less than 25% Tie contractor fees to delivery of critical project goals 4 26 Involve business leaders from across the organisation in project planning 24 Prepare contingency plans for all major tasks 13 Define legal escalation steps for dispute resolution 5 Pad the project’s schedule and budget 4 Require arbitration in cases of unresolved conflict 2 Other 219 © Economist Intelligence Unit Limited 2012
  • 21. Appendix Building in changeSurvey results Project construction in asset-intensive industries In your estimation, what percentage of your organisation’s Of those projects that were not delivered to construction projects come in to specifications? specifications, what percentage of the overrun do you (% respondents) attribute to unexpected change? (% respondents) 90-100% 46 90-100% 75-89% 19 34 75-89% 50-74% 18 13 50-74% 25-49% 14 4 25-49% Less than 25% 16 2 Less than 25% 33 Of those projects that were not delivered on schedule, what percentage of the overrun do you attribute to When you address change requests on a construction project, unexpected change? what are the most important factors to consider? (% respondents) Select the top three. (% respondents) 90-100% 20 How the change will affect the schedule 75-89% 52 23 The risks associated with the change 50-74% 45 19 The long-term cash flow implications of the change 25-49% over the lifecycle of the project 16 42 Less than 25% The direct price of the change 23 35 The feasibility of the change 34 The opportunity costs associated with the change Of those projects that were not delivered on budget, 23 what percentage of the overrun do you attribute to Whether you can make up the time/cost in other areas of the project unexpected change? 23 (% respondents) How costs will be shared between contractor and owner 21 90-100% Whether the project sponsors want the change 19 12 75-89% Other 23 1 50-74% Don’t know 22 1 25-49% 15 Less than 25% 2120 © Economist Intelligence Unit Limited 2012
  • 22. Appendix Building in changeSurvey results Project construction in asset-intensive industries Select the statement that best describes how your organisation Select the statement that best describes how your organisation approaches major project change. approaches major project change. (% respondents) (% respondents) We have formal change We build a business request process that is case for the change clearly defined in the that we present to contract and followed project leaders and for every major change 65 stakeholders who approve or deny it 64 We have an informal change request process We report the change that differs depending request to project on the project or leaders who approve or change being deny it 36 considered 35 Select the statement that best describes how your organisation Select the statement that best describes how your organisation approaches major project change. approaches major project change. (% respondents) (% respondents) We assess the cost and We communicate the schedule impact, across change to everyone on the entire project the project, including lifecycle 58 contractors, stakeholders and the We assess the cost and community 60 schedule impact of the change to the project’s We communicate the completion 42 change only to those who will be responsible for implementing it 40 Select the statement that best describes how your organisation approaches major project change. (% respondents) We take advantage of contingency budgets across our entire project portfolio to accommodate the change 53 We look for ways to cut cost elsewhere in the specific project to make up for the change 4721 © Economist Intelligence Unit Limited 2012
  • 23. Appendix Building in changeSurvey results Project construction in asset-intensive industries In your opinion, what are the greatest challenges to In your opinion, what measures would most improve the way addressing change on a construction project? your organisation plans and manages construction projects? Select the top three. Select the top three. (% respondents) (% respondents) Delivering the project to scope, budget and schedule despite the change Spend more upfront time defining the scope, resource demands, 58 budget and schedule for the project Assessing the feasibility and cost of changes 48 41 Build more collaborative relationship with your contractor Defining the ROI of the change to the project and making 40 the business case for change to stakeholders Reward contractors for proactively dealing with problems 36 33 Anticipating potential changes Hold contractors financially accountable for delays, 35 changes and scope creep Conducting risk analysis of the change 31 34 Invest more time in evaluating and choosing contractors Making contingency plans to accommodate potential changes 27 33 Establish quantifiable key performance indicators Communicating the lifecycle impact of change as a measure of project success to everyone involved with the project 26 27 Create a more robust change management review process Measuring the impact of the change after it has been implemented 25 15 Involve more people from across the organisation in the Other contractor selection and project planning process 1 24 Don’t know Involve key stakeholders in oversight of 2 project planning and implementation 22 Define dispute mitigation steps, including legal ramifications, as part of the contract 6 Other 1 Don’t know 2 How effective is your organisation at these aspects of managing change on construction projects? Rate on a scale of 1 to 5, where 1=Extremely effective; 3=Neutral; 5=Not at all effective. (% respondents) 1 Extremely 2 3 Neutral 4 5 Not at all Don’t know effective effective Anticipating potential changes 8 35 41 11 3 3 Making contingency plans to accommodate potential changes 7 39 36 12 3 2 Assessing the feasibility and cost of changes 15 45 29 7 2 3 Defining the ROI of the change to the project and making the business case for change to stakeholders 11 31 35 14 5 4 Delivering the project to scope, budget and schedule despite the change 11 40 26 17 4 2 Communicating the lifecycle impact of change to everyone involved with the project 10 28 30 18 10 3 Conducting risk analysis of the change 11 38 30 14 4 3 Measuring the impact of the change after it has been implemented 9 31 32 17 6 522 © Economist Intelligence Unit Limited 2012
  • 24. Appendix Building in changeSurvey results Project construction in asset-intensive industries In which country are you personally located? Which of the following best describes your title? (% respondents) (% respondents) United States of America Board member 25 4 United Kingdom CEO/President/Managing director 12 20 India CFO/Treasurer/Comptroller 8 10 Canada CIO/Technology director 4 3 China, Malaysia, Singapore Other C-level executive 3 5 Australia, Spain, France, Brazil, Germany, Indonesia, New Zealand, Nigeria SVP/VP/Director 2 9 Italy, Switzerland, Argentina, Austria, Finland, Hong Kong, Ireland, Head of business unit Mexico, Pakistan, Portugal, Russia, South Africa, South Korea, Chile, 5 Greece, Kenya, Philippines, Poland, Romania, Saudi Arabia, Tanzania, Head of department Thailand, United Arab Emirates 15 1 Manager 21 Other 9 In which region are you personally located? (% respondents) North America What are your main functional roles? 29 Choose up to three. Western Europe (% respondents) 29 Asia-Pacific General management 27 36 Middle East and Africa Strategy and business development 8 34 Latin America Finance 6 23 Eastern Europe Operations and production 2 22 Marketing and sales 16 Risk What are your organisation’s global annual revenues 10 in US dollars? Supply-chain management (% respondents) 9 R&D 7 $500m or less 32 Customer service 7 $500m to $1bn 13 Procurement $1bn to $5bn 19 6 $5bn to $10bn 13 IT 6 $10bn or more 24 Information and research 4 Legal 3 Human resources 2 Other 923 © Economist Intelligence Unit Limited 2012
  • 25. Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsors of this report can accept anyCover: Shutterstock responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper. 24
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